Is The U. S. Having A Technical Recovery Rather Than Real Recovery

This May Not Be Good

Although The Dismal Political Economist has warned that the May employment data is for too short a time from which to draw conclusions, it is becoming clear that even if the economy has not completely stalled, it has definitely slowed from its earlier strong showing in growth and other activity.  If the trend continues, this may mean that the recovery that has been seen for the past year or so has been a technical recovery, not a sustainable one.

A technical recovery occurs when an economy grows and job losses slow only because of the natural forces which will cause a short uptick as opposed to sustained growth as the result of policy decisions.  In a technical recovery, the following things happen.

1. Consumer spending rebounds on certain products because it must.  For example, after several years of highly depressed auto sales, auto sales will increase because at some point consumers and businesses must upgrade their fleets.  Autos are an integral part of the transportation system in the U. S. and replacement spending cannot be deferred forever.

2. In the same vein, consumer spending on both durable and non-durable goods must rise in order to replace items that have just plain worn out.

3. Business investment in inventory, fixed assets and plant and equipment, increases for the same technical reason.  As machinery wears out and real property deteriorates and inventory is reduced they must be replaced, even if there is no economic incentive to do so.  The money must be spent to remain in business.

4. At the end of a deep recession  companies find that they have laid off all of the non-essential workers that they can,  As the technical recovery takes place they change part time workers into full time workers, they give full time workers overtime, and only when that is exhausted to they go out and hire new workers.  In a technical recovery employment grows at a very slow rate.

5. As things get better, consumers rebuild their credit base, and borrowing for consumption increases, leading to positive but low economic growth.

The economic data that has been released so far for 2011 supports the proposition that the U. S. is experiencing a technical recovery.  Spending is increasing in the expected sectors, unemployment is falling but slowly and consumer credit is increasing slightly.

Most post WWII recessions have been brief 12 to 18 months with a quick sustained recovery.  The reason that the Great Recession of 2008 has not been like that has been the fact that in addition to normal recessionary factors, primarily lower demand that leads to negative growth and high unemployment, the 2008 recession had two non traditional elements present.

1. There was a bursting of the real estate bubble.  The decline in real estate prices robbed consumers of both wealth and collateral for financing debt to drive consumption.

2.  The near collapse of financial institutions has made them very wary about extending credit, and even with the bountiful amount of bank reserves injected into the system, the supply of credit to business has not been forthcoming in an adequate amount.

Neither of these two factors were adequately taken into account when designing the stimulus packages.  Consequently the stimulus package may have produced a technical recovery, but not a sustained policy driven one.

The problem with a technical recovery is that is does not continue unless factors are present that will push it into a sustained economic recovery.  When the economy is in a liquidity trap, with interest rates at the lowest level possible, only expansionary fiscal policy can push the economy forward. That this is not happening is due to the lack of expansionary fiscal policy, the budget deficit notwithstanding.  Continuation of tax cuts in late 2010 did not impact the economy at the margin, and the other new tax cuts were not consumption driving policy.

Even worse, the discussions in Washington are not over how to get growth and employment back to normal levels, but how to cut government spending.  To assume that such actions will lead to increases rather than decreases in economic activity is the triumph of folly over reality.